Fair Value Disclosures

12 Months Ended

Oct. 31, 2019

Financial Instruments

A summary of assets and (liabilities) at October 31, 2019 and 2018, related to our financial instruments, measured at fair value on a recurring basis, is set forth below (amounts in thousands):



		Fair value
Financial Instrument	Fair value hierarchy	October 31, 2019			October 31, 2018
Residential Mortgage Loans Held for Sale	Level 2	$	218,777		$	170,731
Forward Loan Commitments – Residential Mortgage Loans Held for Sale	Level 2	$	298		$	1,750
Interest Rate Lock Commitments (“IRLCs”)	Level 2	$	964		$	(4,366	)
Forward Loan Commitments – IRLCs	Level 2	$	(964	)	$	4,366

At October 31, 2019 and 2018, the carrying value of cash and cash equivalents and customer deposits held in escrow approximated fair value.

Mortgage Loans Held for Sale

At the end of the reporting period, we determine the fair value of our mortgage loans held for sale and the forward loan commitments we have entered into as a hedge against the interest rate risk of our mortgage loans and commitments using the market approach to determine fair value. The evaluation is based on the current market pricing of mortgage loans with similar terms and values as of the reporting date and the application of such pricing to the mortgage loan portfolio. We recognize the difference between the fair value and the unpaid principal balance of mortgage loans held for sale as a gain or loss. In addition, we recognize the fair value of our forward loan commitments as a gain or loss. These gains and losses are included in “Other income – net” in our Consolidated Statements of Operations and Comprehensive Income. Interest income on mortgage loans held for sale is calculated based upon the stated interest rate of each loan and is also included in “Other income – net.”

The table below provides, for the periods indicated, the aggregate unpaid principal and fair value of mortgage loans held for sale as of the date indicated (amounts in thousands):



At October 31,	Aggregate unpaid principal balance		Fair value		Excess
2019	$	216,280	$	218,777	$	2,497
2018	$	170,728	$	170,731	$	3

IRLCs represent individual borrower agreements that commit us to lend at a specified price for a specified period as long as there is no violation of any condition established in the commitment contract. These commitments have varying degrees of interest rate risk. We utilize best-efforts forward loan commitments (“Forward Commitments”) to hedge the interest rate risk of the IRLCs and residential mortgage loans held for sale. Forward Commitments represent contracts with third-party investors for the future delivery of loans whereby we agree to make delivery at a specified future date at a specified price. The IRLCs and Forward Commitments are considered derivative financial instruments under ASC 815, “Derivatives and Hedging,” which requires derivative financial instruments to be recorded at fair value. We estimate the fair value of such commitments based on the estimated fair value of the underlying mortgage loan and, in the case of IRLCs, the probability that the mortgage loan will fund within the terms of the IRLC. The fair values of IRLCs and forward loan commitments are included in either “Receivables, prepaid expenses and other assets” or “Accrued expenses” in our Consolidated Balance Sheets, as appropriate. To manage the risk of non-performance of investors regarding the Forward Commitments, we assess the creditworthiness of the investors on a periodic basis.

Inventory

We recognize inventory impairment charges based on the difference in the carrying value of the inventory and its fair value at the time of the evaluation. The fair value of the aforementioned inventory was determined using Level 3 criteria. Estimated fair value is primarily determined by discounting the estimated future cash flow of each community. See Note 1, “Significant Accounting Policies - Inventory,” for additional information regarding our methodology on determining fair value. As further discussed in Note 1, determining the fair value of a community’s inventory involves a number of variables, many of which are interrelated. If we used a different input for any of the various unobservable inputs used in our impairment analysis, the results

of the analysis may have been different, absent any other changes. The table below summarizes, for the periods indicated, the ranges of certain quantitative unobservable inputs utilized in determining the fair value of impaired communities:



Three months ended:	Selling price per unit ($ in thousands)	Sales pace per year (in units)	Discount rate
Fiscal 2019:
January 31	836 - 13,495	2 - 12	12.5% - 15.8%
April 30	372 - 1,915	2 - 19	12.0% - 26.0%
July 31	530 - 1,113	2 - 9	7.8% - 13%
October 31	478 - 857	2 - 5	13.8% - 14.5%

Fiscal 2018:
January 31	381 - 1,029	7 - 10	13.8% - 19.0%
April 30	485 - 522	10 - 16	16.9%
July 31(1)	–	–	–
October 31	470 - 1071	4 - 23	13.5% - 16.3%


(1)	The impairment charges recognized were related to our decisions to sell lots in a bulk sale in certain communities rather than sell and construct homes as previously intended. The sale price per lot used in the fair value determination for these bulk sales ranged from $10,000 to $155,000.

The table below provides, for the periods indicated, the number of operating communities that we reviewed for potential impairment, the number of operating communities in which we recognized impairment charges, the amount of impairment charges recognized, and, as of the end of the period indicated, the fair value of those communities, net of impairment charges

($ amounts in thousands):



		Impaired operating communities
Three months ended:	Number of communities tested	Number of communities	Fair value of communities, net of impairment charges		Impairment charges recognized
Fiscal 2019:
January 31	49	5	$	37,282	$	5,785
April 30	64	6	$	36,159	17,495
July 31	69	3	$	5,436	1,100
October 31	71	7	$	18,910	6,695
					$	31,075
Fiscal 2018:
January 31	64	5	$	13,318	$	3,736
April 30	65	4	$	21,811	13,325
July 31	55	5	$	43,063	9,065
October 31	43	6	$	24,692	4,025
					$	30,151
Fiscal 2017:
January 31	57	2	$	8,372	$	4,000
April 30	46	6	$	25,092	2,935
July 31	53	4	$	5,965	1,360
October 31	51	1	$	6,982	1,500
					$	9,795

Debt

The table below provides, as of the dates indicated, the book value and estimated fair value of our debt at October 31, 2019 and 2018 (amounts in thousands):



		2019				2018
	Fair value hierarchy	Book value		Estimated fair value		Book value		Estimated fair value
Loans payable (a)	Level 2	$	1,114,577	$	1,112,040	$	688,115	$	687,974
Senior notes (b)	Level 1	2,669,876		2,823,043		2,869,876		2,779,270
Mortgage company loan facility (c)	Level 2	150,000		150,000		150,000		150,000
		$	3,934,453	$	4,085,083	$	3,707,991	$	3,617,244


(a)	The estimated fair value of loans payable was based upon contractual cash flows discounted at interest rates that we believed were available to us for loans with similar terms and remaining maturities as of the applicable valuation date.


(b)	The estimated fair value of our senior notes is based upon their market prices as of the applicable valuation date.

(c)

We believe that the carrying value of our mortgage company loan borrowings approximates their fair value.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References + Details